managerial accounting handouts

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MANAGERIAL ACCOUNTING
Lecturer
Nguyen Phong Nguyen
Auditor - PricewaterhouseCoopers
Lecturer in Accounting -
University of Economics HCMC
MA. Monash University (Australia)
DBA Candidate. University of
Western Sydney (Australia)
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Section 1
Introduction to Managerial
Accounting
Learning Objectives
1. Explain the meaning of managerial
accounting.
2. Explain the objectives of managerial
accounting.
3. Explain the differences between managerial
accounting and financial accounting.
4. Explain the importance of ethical behavior for
managers and managerial accountants.
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The Meaning of
Managerial Accounting
►Managerial Accounting is the provision of
accounting information for a company’s internal
users.
►Managerial accounting has three broad objectives:
Comparison of Financial and Managerial Accounting

Aggregation
Time orientation
Types of
information
Restrictions
Users
Managerial Accounting Financial Accounting
Internal users External users
No mandatory rules for
preparing reports
Must follow GAAP
when preparing FSs
Financial and non-
financial information
Financial information
Future oriented Historical oriented
Detailed information
about product line,
departments
Information about
overall firm
performance
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Comparison of Financial and
Managerial Accounting
(continued)
The key point is flexibility—
the accounting system should be able to supply
different information for different purposes.
Managerial Accounting

and Ethical Conduct
►The objective of profit maximization should
be constrained by the requirement that
profits be achieved through legal and ethical
means.
►Ethical behavior involves choosing actions
that are right, proper, and just.
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IMA Ethical Principles
►Competence – maintain an appropriate level of
professional expertise by continually developing
knowledge and skills;
►Confidentiality – refrain using confidential
information for unethical or illegal advantage;
►Integrity – abstain from engaging in or supporting
any activity that might discredit the profession; and
►Credibility – communicate information fairly and
objectively.
Study questions – Q1
►How do managerial accounting and financial accounting
differ?
►Managerial accounting is internally focused, does not follow
mandatory rules, keeps track of both financial and nonfinancial
information, emphasizes the future, and provides detailed
information about various aspects of company management.
Financial accounting, on the other hand, is externally focused,
follows externally imposed rules (such as GAAP), keeps track of
financial information, has a historical orientation, and provides
information about the company as a whole.
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Study questions – Q2
►What are the three broad objectives of
managerial accounting?
►The three broad objectives of managerial
accounting are planning, controlling, and decision
making.
Study questions – Q3
►What is ethical behavior? Explain the
underlying code of ethics of the IMA.
►Ethical behavior is choosing actions that are
right, proper, and just
. The code of ethics of IMA
includes four principles: competence,
confidentiality, integrity, and credibility [See the
slide with title “IMA ethical principles”].
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Study questions – Q4
►Should a MAS provide both financial and non-
financial information?
►A managerial accounting information system
typically provides both financial and nonfi-nancial
information. For example, financial information
on cost of production is tracked. Other
information, such as the number of warranty
returns, may also be tracked by the management
information system.
Section 2:
Basic Cost Concepts and
Classifications
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Learning Objectives
1. Explain the meaning of cost and how costs
are assigned to products and services.
2. Define how costs are classified (cost
classification).
3. Apply cost estimation methods to separate
mixed costs into fixed and variable
elements.
What is cost?
►Cost is the amount of cash or cash equivalent
sacrificed for goods and/or services that are
expected to bring a current or future benefit to
the organization.
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Cost Objects
►A cost object is any item such as a product,
customer, department, project, geographic
region, plant, and so on, for which costs are
measured and assigned.
Assigning Costs
What is the
cost object
for the
phone call?
Assigning costs is the way that a cost is linked to
some cost object.
To support
Manufacturing?
To support Selling
the Product?

?????
?????
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Direct Costs
►Direct costs are those costs that can be easily
and accurately traced to a cost object.
►When we say that a cost is EASY TO TRACE,
we often mean that the relationship between
the cost and the object can be physically
observed and is easy to track.
►The more costs that can be traced to the
object, the more accurate are the cost
assignments.
Indirect Costs
►Indirect costs are costs that CANNOT BE
EASILY AND ACCURATELY TRACED to a cost
object.
►Allocation means that an indirect cost is
assigned to a cost object by using a
reasonable and convenient method.
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Exercise 2.30
a. Salary of cell supervisor
b. Power to heat and cool the plant in which the cell is located
c. Materials used to produce the motors
d. Maintenance for the cell’s equipment
e. Labor used to produce motors
f. Cafeteria that services the plant’s employees
g. Depreciation on the plant
h. Depreciation on equipment used to produce the motors

i. Ordering costs for materials used in production
j. Engineering support
k. Cost of maintaining the plant and grounds
l. Cost of the plant’s personnel office
m. Property tax on the plant and land
Object Costing
► Direct and indirect costs occur in service businesses as well.
► Some businesses refer to indirect costs as overhead costs or support
costs
.
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Cost classifications
►For external reporting
► Product costs
► Non – product cost
►For decision making (cost behavior)
► Variable costs
► Fixed costs
Product Costs
►Products are goods produced by converting
raw materials through the use of labor and
indirect manufacturing resources, such as the
manufacturing plant, land, and machinery.
►Televisions, hamburgers, automobiles,
computers, clothes, and furniture are examples of
products.
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Determining Product Cost
►Product (manufacturing) costs are those
costs, both direct and indirect, of producing a

product in a manufacturing firm or of
acquiring a product in a merchandising firm
and preparing it for sale.
Determining Product Cost
(continued)
►Product costs initially are added to an inventory
account and remain in inventory until they are sold,
at which time they are transferred to cost of goods.
►Product costs can be further classified as direct
materials, direct labor, and manufacturing
overhead.
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Direct Materials
►Direct materials are those
materials that are a part of
the final product and can be
directly traced to the goods
being produced.
Direct Labor
►Direct labor is the labor that can be directly traced to
the goods being produced.
►Physical observation can be used to measure the amount of
labor used to produce a product
.
►Those employees who convert direct materials into a product
are classified as direct labor.
►A company can also have indirect labor costs.
►Indirect labor is included in overhead and, therefore, is an
indirect cost rather than a direct cost.
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Manufacturing Overhead
► All product costs other than direct materials and direct labor
are put into a category called manufacturing overhead.
►In a manufacturing firm, manufacturing overhead also is known
as factory burden or indirect manufacturing costs.
► Costs are included as manufacturing overhead if they cannot
be traced to the cost object of interest (e.g., unit of product).
► The manufacturing overhead cost category contains a wide
variety of items.
►Examples of manufacturing overhead costs include depreciation
on plant buildings and equipment, janitorial and maintenance
labor, plant supervision, materials handling, power for plant
utilities, and plant property taxes.
Exercise 2.31
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Exercise 2.31 (cont’d)
Calculating Total Product Cost
►The total product cost equals the sum of direct
materials, direct labor, and manufacturing
overhead:
►Total product post = Direct materials cost + Direct labor
cost + Manufacturing overhead cost
►The unit product cost equals total product cost
divided by the number of units produced:
►Per-unit Cost = Total Product Cost ÷ Number of Units
Produced
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Exercise 2.29
1. Direct materials—Product cost
Direct labor—Product cost

Manufacturing overhead—Product cost
Selling expense—Period cost
2. Direct materials $7,000
Direct labor 3,000
Manufacturing overhead 2,000
Total product cost $12,000
3. Unit product cost = $12,000/6.000 = $2.00
Period Costs
►The costs of production are assets that are carried in
inventories until the goods are sold.
►There are other costs of running a company, referred to
as period costs, that are not carried in inventory.
►Thus, period costs are all costs that are not product
costs.
►The cost of office supplies, research and
development activities, the CEO’s salary, and
advertising are examples of period costs.
►Period costs typically are expensed in the period in
which they are incurred.
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Selling Costs
► Those costs necessary to market, distribute, and service a
product or service are selling costs.
EXAMPLES
Warehousing
Shipping
Customer
Service
EXAMPLES
Sales personnel

Salaries &
Commissions
Advertising
Administrative Costs
►All costs associated with research, development, and
general administration of the organization that cannot
reasonably be assigned to either selling or production
are administrative costs.
►Examples of general administrative costs are executive
salaries, legal fees, printing the annual report, and general
accounting.
►Research and development costs are the costs associated with
designing and developing new products and must be
expensed in the period incurred.
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Cornerstone 2-3
Calculating Direct Materials Used in
Production
Work-in-Process
► Once the direct materials are calculated, the direct labor and
manufacturing overhead for the time period can be added to get
the total manufacturing cost for the period.
► The second type of inventory—work in process (WIP) is the cost
of the partially completed goods that are still on the factory floor
at the end of a time period.
► WIP units have been started, but not finished; they have some value, but
not as much as they will when they are completed; and there are
beginning and ending inventories of WIP.
► We must adjust the total manufacturing cost for the time period for the
inventories of WIP.

► When that is done, we will have the total cost of the goods that were
completed and transferred from work-in-process inventory to finished
goods inventory during the time period.
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Cornerstone 2-4
Calculating Cost of Goods Manufactured
Cornerstone 2-4
Calculating Cost of Goods Manufactured
(continued)
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Cost of Goods Sold
► To meet external reporting requirements, costs must be
classified into three categories:
►Production
►Selling
►Administration
► Cost of goods sold represents the cost of goods that were
sold during the period and, therefore, transferred from
finished goods inventory on the balance sheet to cost of
goods sold on the income statement (i.e., as an inventory
expense). Cost of goods sold is calculated as:
Cost of goods sold = Beginning finished goods inventory + Cost
of goods manufactured - Ending finished goods inventory
Cornerstone 2-5
Calculating Cost of Goods Sold
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Basics of Cost Behavior
► Cost behavior is the general term for describing whether a
cost changes when the level of output changes.
► Costs can be variable, fixed, or mixed.

► A cost that does not change in total as output changes is a
fixed cost.
► A variable cost, on the other hand, increases in total with an
increase in output and decreases in total with a decrease in
output.
► Knowing how costs change as output changes is essential to
planning, controlling, and decision making.
Relevant Range and Cost
Relationships
► The relevant range is the range of output over which the
assumed cost relationship is valid for the normal operations
of a firm.
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Fixed Costs
► Fixed costs are costs that in total are constant within the relevant range as
the level of output increases or decreases.
► In this example of Colley Computers, notice while the total fixed cost of
supervision remains the same, the unit cost decreases as more computers
are produced.
Discretionary Fixed Costs and
Committed Fixed Costs
► Discretionary fixed costs are fixed costs that can be changed
or avoided relatively easily at management discretion.
► Committed fixed costs, on the other hand, are fixed costs
that cannot be easily changed.
Advertising
is a discretionary fixed
cost, because it
depends on a
management decision.

Lease cost
is a committed fixed
cost because it
involves a long-term
contract.
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Variable Costs
► Variable costs are costs that in total vary in direct proportion to changes
in output within the relevant range.
► Variable costs can also be represented by a linear equation.
► Total variable costs depend on the level of output.
► This relationship can be described by the following equation or graphs:
Total variable costs = Variable rate x Amount of output
Mixed Costs
► Mixed costs are costs that have both a fixed and a variable
component. For example, overhead for a company may consist of a
fixed supervisor salary plus the cost of supplies that vary with the
quantity of output produced. The formula and graph depiction for a
mixed cost is as follows:
Total cost = Total fixed cost + Total variable cost
Volume
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Step Costs: Narrow Steps
► Some cost functions may be
discontinuous.
► These costs are known as step
costs (or semi-fixed).
► A step cost displays a constant
level of cost for a range of output
and then jumps to a higher level

(or step) of cost at some point,
where it remains for a similar
range of output.
► If a step cost has relatively narrow
steps, it means that the cost changes
in response to fairly small changes in
output and we can approximate it as a
variable cost (i.e., the red line).
Step Costs: Wide Steps
► Step cost with relatively wide steps
are more characteristic of fixed
costs.
► For example, a company may have
to lease production machinery. If
the machine can only produce
1,000 units and the company
grows, they will have to lease
additional machines for each 1,000
units of production needed
(resulting in the wide steps shown
in the graph).